It is Christmas time! For many, this is a time of reflection and celebration of the birth of Jesus. For them and for many others, it is a time of celebrating one another and the giving of gifts. Hopefully, this gift giving is done out of the excess of resources that people find in their lives but, honestly, we know that a huge percentage of those gifts are purchased on lines of credit. As a bankruptcy attorney, I have noticed a seasonal drop in the number of bankruptcy filings in November and December followed by an uptick a few months later.
The courts and trustees recognize this seasonal event and seasonal spending as well but, let’s be reasonable in it because abuse has consequences. There are a few laws in place in the bankruptcy code that prevent debtors (the name given to the person who has the debts and seeks bankruptcy protection) from abusing the creditors (what those companies or persons are called who extend lines of credit). The chief provisions are found in 11 USC Sect. 523(2)(C)(i)(I) & (II).
The first one prevents debts being discharged if the money owed went to purchase “luxury goods”. A luxury good is defined as a single item or service that is worth more than $500.00. If this item was purchased using borrowed money from a single creditor within ninety days of the date the bankruptcy is filed, then that creditor has a valid objection to that particular debt getting discharged. Because of inflation, $500.00 does not go as far as it used to, so more and more things will count as luxury goods. I do not mean to suggest creditors pursue these claims often, because they do not, but it could happen and I would hate for you to be a creditor’s test case.
There is a sort of “safe haven” for luxury goods that specifies that they are NOT items or services to meet the needs of the debtor or a dependent of the debtor. So, if someone needs to get groceries, medical care, car repairs, or replace a NECESSARY and defunct appliance such as a dead refrigerator, then the luxury good prohibition does not apply even if purchased during Christmas. It must not be a gift for someone and, let’s still be reasonable, just because your refrigerator stops workings on the eve of a bankruptcy does not give license to buy the very best replacement (usually though, appliances purchased on credit create a type of debt called a purchase money security interests or PMSI which is a whole separate topic).
The second prohibition is for cash advances that aggregate more than $750.00 from an open end line of credit within seventy days of the filing date of bankruptcy. A an open ended line of credit is typically an unsecured signature loan or a credit card. Here, one needs to be careful because multiple cash advances from one line of credit can end up surpassing that limit in those seventy pre-filing day pretty quickly.
Finally, there is a specific protection built into the Chapter 7 bankruptcy laws. Some refer to Chapter 7 as “full” or “whole” bankruptcy though that is a bit of a misnomer. Anyway, 11 USC Sect. 727 stops ALL debts from being discharged if the debtor has engaged in fraud in creating their debts or obtaining a discharge of those debts. This statute has been interpreted on a practical level to require a pattern of conduct by the debtor instead of a single incident since it stops the discharge entirely rather than individual debts.
So, enjoy the season. Be generous from the bounty you have. Use credit judiciously if you must to meet your family’s needs. And feel free to contact us if you end up buried under more debt than you can handle.
I have written about this before, but it bears repeating. I am not offering smoke and mirrors here, but just straight up information. There is a competitor’s ad campaign that has garnered considerable attention and it promises to get a bankruptcy started for $78.00. The ad goes on to note that certain restrictions and qualifications apply to this offer. And, I am sure they do explain those once your come in to meet with them. I have not interviewed my competitors on this issue, so I cannot say with certainty, but I can only contemplate one way that they can actually get a bankruptcy started for $78.00 and that is in a Chapter 13. It just so happens that you can pay the $310.00 filing fee that the court charges for a Chapter 13 (or the $335.00 for a Chapter 7) in four monthly installments. Each installment for the Chapter 13 would be $77.50 and thus we have you entering into a Chapter 13 paying only that first installment (and rounding it up gives you the $78).
I can do this for you also. However, I would need to figure out how much of a plan payment you would be able to afford because paying payments each month makes up a Chapter 13 in contrast to a Chapter 7. That would be the restriction. The Chapter 13 can run as short as 36 months or as long as 60 months depending on your household income. Attorney fees run higher in a 13 than a 7 but those higher fees can be paid through the plan itself. I only recommend going this route if it is the only way you can get into a bankruptcy and get the relief you need. You must qualify for a Chapter 13 which includes having a regular source of income and that income must be sufficient to pay enough in a plan payment to cover the attorney fees, trustee commission, certain tax debts, and certain secured debt arrears. The hitch with going this route is that the less your pay up front on attorney fees, the higher the plan payment has to be after filing. That may be perfectly fine and work well, I just want you to know that in advance rather than when I have you already in my office. There is also a credit counseling course that must be done through a third party prior to filing and this can run anywhere from $10 to $25 directly to that company. This a legal requirement of the law and not something that can be circumvented.
How would I be able to go beyond a firm that can get you into a bankruptcy for $78.00? Well, I do all the work myself. From the initial phone call to the initial meeting all the way through to the discharge order being issued at the end of the bankruptcy – it is all with me personally. That is to say, you will not be interacting with secretaries, paralegals or other attorneys (unless there is a true emergency); you will be interacting with me. I will be the familiar face that shows up with you at the meeting of creditors and the same voice on the phone who helps explain things along the way. That is simply how I chose to practice law, by keeping overhead low and doing it myself rather than shooting for high volume. That competitor does a fine job from what I can tell; it just done using lots of staff. If my individualized and personal approach appeals to you, then come in to see me and I will see if I can match any competitors’ offer for a bankruptcy or even go beyond what they have to offer. There is no charge for that initial consultation and I do NOT limit it to 1/2 an hour.
This post will only apply to a narrow segment of people forced to consider bankruptcy – those who have a bunch of equity in their house along with a hefty debt in which their spouse does not have liability. Most often, this would be an entrepreneur whose business venture took a downturn.
I have discussed previously how Chapter 13 is a great mechanism for preserving one’s house if there are arrears to be dealt with or if there is excess equity beyond what can be covered by a homestead exemption. However, Chapter 13 is not for everyone. There are debt ceilings in a Chapter 13 that can operate to knock out business people who have personally guaranteed large amounts of unsecured business debt or even larger levels of secured debt. There also needs to be a somewhat predictable income upon which to base the budget and plan payment. This makes Chapter 13 difficult for people who may go months at a time without income due to the way their employment is structured, such as an entrepreneur.
Going into a Chapter 7, though, with excess equity in one’s house can be dangerous. Excess equity exists if there is a substantial value to the house even after subtracting the secured debt on it and the exemptions available. You see, a Chapter 7 trustee only makes about $60.00 per case unless they find non-exempt assets they can liquidate and distribute to unsecured creditors. The trustee gets a percentage of all such assets.
This brings us to the strategy that relies on a number of “ifs” being true. This strategy can be helpful (though certainly not a panacea): 1) If the Debtor is married and their spouse is NOT also indebted on the majority of debt so that they do not have to file also, 2) If the husband and wife share the home as tenants in the entirety (the deed gives then ownership “for their joint lifetimes with the remainder in fee simple to the survivor of them”), and 3) the Debtor has some exempt or non-estate resource to make a lump-sum offer to the trustee. The strategy is simply to go into Chapter 7 bankruptcy as an individual and then hope your spouse outlives you or you can make a deal with the Trustee.
The Trustee can seize non-exempt assets of the Debtor and liquidate them in a Chapter 7, but they must do this liquidating under state law. Kentucky law only allows a creditor (or Trustee) to sell the expectancy interest of a Debtor in real estate that they own as tenants in the entirety with a non-debtor spouse. The expectancy interest is that if they outlive their non-debtor spouse, then they have the entire undivided homestead as their own, but if their spouse outlives them then there is nothing – the entire undivided homestead goes to the surviving non-debtor spouse. So, the question becomes: “How much would someone pay for a chance that the non-debtor spouse dies first?” That amount, whatever it may be, is the actual value that the trustee would receive in selling the Debtor’s interest in the house.
In other words, a home owned in the way I described by a husband and wife cannot be stripped away from the non-debtor spouse. He or she is entitled to all of that home concurrently with the Debtor; it cannot be divided. A creditor cannot even get half the rents, if there were any. They can only obtain that expectancy – that chance that they may get it all. Because of that, many Trustee’s would be open to a reasonable lump-sum payment from the Debtor to retain their expectancy interest rather than risk coming up with a goose-egg by trying to sell what essentially amounts to a lottery ticket on the court house steps.
No, this sort of garnishment is not found on a fancy Christmas dinner plate. This is a legal mechanism by which creditors can get the money you owe them without your consent. Once a creditor has obtained a judgment against you in a court of law (and there are some government creditors that do not have to go through the court process, but still have to issue notice), they can obtain a garnishment order that you will not be aware of until it hits.
Garnishments typically take two forms. The one most people are aware of is a wage garnishment. This is an order issued to the debtor’s employer to withhold up to a certain percentage of the pay. This can actually be a huge hit, but it is only the “one” punch that leaves your head spinning. The “two” knockout punch that often surprises people is a bank account garnishment. So, if your paycheck is direct deposited into an account, the creditor can scoop the rest of your income right out of the bank leaving you with no means to pay electricity, rent or a house payment.
While a wage garnishment is an ongoing order that allows for up to a certain percentage to be seized each month, the bank account is a one time hit, yet it takes all. However, the creditor can issue new bank account garnishments so as to hit the accounts repeatedly over time getting whatever happens to be in there at that moment.
The only defense once this barrage of punches starts flying is to file bankruptcy. If an individual creditor seizes more than $600.00 through these garnishments in the 90 days immediately preceding filing, then there is a chance of recovering them. So, it is important to take action and seek the counsel of a bankruptcy attorney before you are down for the count.
Well, no one does. That is a given. However, there are a few things to remain aware of if bankruptcy is something you have been contemplating here recently:
1) Any gifts you receive of substantial value at Christmas are going to have to be listed in your bankruptcy on Schedule B and exempted on Schedule C. You will need to individually identify any particular item you received that is worth hundreds of dollars.
2) Any expensive item you purchase, whether keeping it in house or giving it away to someone else, will have to be reported as well. If it is a luxury item, that is something costing more than $650.00, you will be raising red flags and risk losing the discharge of that debt.
3) Your right to receive a tax refund arises on December 31st of each year if you overpaid your income taxes. This is true whether you file a tax return right away or wait until the last minute. That tax refund is an asset of the bankruptcy estate upon filing your petition and must be listed on Schedule B and exempted on Schedule C even if you do not know the exact amount you will be receiving.
If you own a home and have a large amount of equity in that property (equity meaning value minus secured debt), you may have a very limited amount of exemption to put towards these assets mentioned above. Consulting with a bankruptcy attorney prior to Christmas may be a wise gift to yourself.
Having a sheriff or constable hand you a summons and complaint (a lawsuit) is an awful feeling. If you have been served with a lawsuit, then you really should consult a lawyer about the particulars of the complaint. This post should not be a substitute for obtaining individualized legal advise. However, I also know that not everyone has access to legal representation. If you are being sued for non-payment of a debt, then you likely have a hard time finding the funds to retain counsel. So, I am offering a few pointers in filing an answer to a complaint in order to protect your interests.
First, though, I want to suggest you reach out to a modest means or pro bono legal clinic if you cannot obtain private counsel. In the Bluegrass area and Eastern Kentucky you can contact: Legal Aid of the Bluegrass, The Fayette County Bar Association, and AppalReD.
Again, this is not a substitute for legal advice:
In Kentucky, a state court lawsuit must be answered within twenty (20) days of being served with the complaint. If the 20th day falls on a weekend or holiday, you have until the next weekday to file your answer, though I always err on the side of filing it a day or two early. If your goal is to delay the lawsuit as long as possible while you pull things together for bankruptcy, then you will wait until the last day of your time before filing your answer (again, I shave a day off just for an abundance of caution). Filing an answer consists of delivering your original, signed answer to the clerk and mailing a copy to each lawyer (or unrepresented party) listed on the complaint you received by first class mail. You do not need to send it certified mail.
The answer consists of three parts. The first part is the “style” of the case. It is all the stuff on the heading of the complaint, except you do not have to list the addresses of the parties – just their names – and you call it an “Answer” rather than “Complaint”. The case number is the most important part because you want the clerk to file your answer in the right case.
The second part is where you either admit or deny the allegations in the complaint. This is where a bit of lawyer speak comes in: if do not know something for certain, but suspect it may be true, you can still deny it by saying “I cannot confirm or deny such and such allegation of the complaint, therefore I deny the same.” You must do this because anything you admit in your answer is not longer a controversy. So, if the lawsuit is filed by the original creditor that you borrowed money from, then you can admit that you owe them a debt, but still deny the exact amount they are claiming is owed. However, if the lawsuit is brought by a collection agency or a party claiming that the debt was assigned to them, you may suspect that to be true, but you really do not know for sure that it was assigned to them correctly. So, you can deny owing that party a debt altogether as well as the amount they claim is owed. You must sign this part of the answer, but do NOT sign for anyone else. If you and your spouse are being sued for the same debt, you each must sign the answer or risk being found to be practicing law without a license.
The third part must also be signed (so you will sign your answer twice). This part simply is a statement saying that you put a copy of your answer into the mail, US Post, first class postage, and then list each party or their lawyer and the address you mailed it to. Again, sign after this statement and make sure you actually do send a copy to that party or lawyer.
Filing the answer can either be hand delivery to the clerk or by mailing your answer in to the clerk. Either way, you also want to submit a cop of your answer along with the original so that the clerk can stamp it and hand the copy back to you. This is your proof of filing the answer just in case the clerks misplace the answer (they do have lots of cases to manage by the way). If you mail your answer in, send a self-addressed, stamped envelope along with the original and copy so the clerk can mail it back to you.
Filing an answer in a lawsuit simply prevents the plaintiff from a quick and easy default judgment against you. It forces them to produce proof to the court. They may do this by way of a Summary Judgment or it may end up being a hearing (especially if it is small claims court). Either way, it typically gains you extra time to either file bankruptcy or prepare a defense.
I have said it many times – nearly everyone who I help with bankruptcy has already gone beyond reason in trying to pay off their debts by the time they reach my door. This post is about one of those very common steps people take in being as responsible as they can for their financial obligations: emptying retirement accounts.
I am not going to say it is a mistake to empty retirement accounts to pay off debt, nor am I going to say it is a good idea. It is simply a choice. However, it is a choice that you need to make armed with knowledge. Under the Federal bankruptcy code, retirement account funds are exempt pursuant to 11 USC 522. If you have over a million dollars in an Individual Retirement Account, though, you need to make sure your attorney is aware of this so their can maximize exemption amounts.
So, if you take money out of retirement to pay off debts, you are converting exempt assets. This is all well and good if, by doing so, you avoid bankruptcy altogether. However, if it only buys time and you end up filing bankruptcy regardless of the valiant effort, then you simply have lost those funds down the black hole of debt. Additionally, you will have incurred extra taxes if you withdraw the funds or borrow them but are unable to repay timely.
These are funds that would have ridden through the bankruptcy and remained available to for starting over after all debts were discharged. It is very difficult to gauge whether the strategy of raiding retirement accounts will pay off or not. Therefore, I strongly recommend getting a third-party, preferably and attorney familiar with the bankruptcy code, to review your situation before you withdraw those funds. As my dad would say, “There’s no use throwing good money after bad!”
First, I want to give a shout-out to my law school compatriot and all ’round helpful attorney, Ben Carter, for his pointers in the consumer protection arena. I recently was approached by a young lady for help with a particular debt. Other than this one liability, she had no debt to speak of and so bankruptcy really would not be the most cost-effective way of dealing with the issue. Bankruptcy will definitely extinguish a debt that arose out of bad practices by the creditor, so if the particular debt is high enough or if there are several issues that could be wrapped up at one time, then bankruptcy would be a route to consider. But when the only issue is a liability that came about by unlawful practices of the creditor, then one can consider another line of attack – pursuing an action under the Kentucky Consumer Protection Act (KCPA).
In my client’s situation, she was approached by a home security company. I do not want to go into the details at the moment because this matter is still pending, but I will say the salesperson for the home security company engaged in some bait-and-switch tactics and made some representations that she relied upon that turned out to be false. She quickly decided to cancel the contract but, as a result of one of those misrepresentations and deceptive acts, she missed the window in which the company (actually it turned out there were two separate companies which made it even harder to know what was what) claimed they would have honored the cancellation. Further, they claimed the damages for stopping the contract were the exact same amount as it would cost for the home monitoring service over three years. I did some research online via the Google (if I call it “the Google” it just sounds more impressive don’t you think?). Apparently complaints of this nature against these two cohort companies is quite widespread.
Now, the really nice thing about pursuing a company for a violation of the KCPA is where suit can be brought. The ordinary rule of procedure in a civil lawsuit is that the suit must be brought where the defendant is located. However, if a person buys stuff or services mainly for personal use, and is subjected to “unfair, false or deceptive acts or practices” (KRS Sect. 367.170) then they can bring suit in their own county’s Circuit Court (KRS Sect 367.220). This is incredibly helpful when, as in this young lady’s situation, both companies are non-Kentucky based businesses. If she had to sue them on their home turf, the cost would be astronomical.
That same statute, KRS 367.220, goes on to make sure judges know that they can award attorney fees to the consumer if they prevail and they can even award punitive damages against the offender. However, to position oneself the best way possible to make either of those things happen, the consumer must document extensive efforts to settle the matter along the way.
Given the generous jurisdiction, venue, and damages provisions of the KCPA, one would think more suits would be brought. This is where the economics of fraud come into play. Businesses that engage in fraudulent practices typically do not go after huge amounts of money. I venture to say that, other than that deposed prince of Nigeria, nearly all businesses who are fraudulent seek to acquire well under $2,000.00 from the consumer. That means that someone seeking to redress the wrong through court could end up spending about as much on a lawyer as the debt itself. And, as with all litigation, there is no certainty of prevailing nor of being awarded attorney fees. Attorneys rarely will pursue one of these cases without some assurance that their time will be compensated and so the “cost-benefit analysis” often favors the dishonorable business. And, there is a dearth of low-income or pro bono legal advocacy programs because our society does not wish to fund them.
There is one more avenue a consumer can take if they cannot find a lawyer. Although there is absolutely no guarantee it would right their own personal injury, they can report the matter to the Attorney General’s Office and that office may investigate the businesses practices. Even if they do investigate and pursue an action, they would not be representing you individually. Furthermore, they state several steps to take first on their website.
All this considered makes bankruptcy a more attractive option to get out from under a debt arising from fraudulent or unfair business practices. When bankruptcy does not make sense, though, it is good to know that other avenues are available.
I had a consult scheduled with a potential client recently who did not make it in. No worries, I just reached out to her to see if she wanted to reschedule. She declined because she had initiated a consolidation loan process to pull together all her outstanding unsecured debts under one, lower interest rate. She was getting this consolidation loan by refinancing her house and using up any equity in the house to secure the loan. I still offered to meet with her – for free even though I likely would see no business result from the meeting. I did not want to talk her out of this plan; I simply wanted to make sure she had full knowledge of all the ramifications. This is because I know people who have done this successfully and avoided bankruptcy. I have known others who did this and it ended up putting their home at risk.
Essentially, a consolidation loan like the own my potential client was wrangling does not reduce debt principal. It usually does reduce interest costs over the lifetime but, to be sure of this, one must factor in the closing costs and fees associated with an equity loan secured by your house. What does happen is that unsecured debt gets converted into secured debt. Secured loans offer lower interest rates because the risk of total loss on the loan is mitigated by the value of the property securing the loan. In other words, if you do not pay they take your house.
A bankruptcy, whether Chapter 7 or Chapter 13, shreds off most or all unsecured debt. So, in a bankruptcy situation, unsecured debt is good debt to have because you will not have it long. Secured debt does not pass away so quietly. You can sever the personal obligation to repay the debt, but there are only very narrow avenues by which the secured obligation – the liability on the property – can be done away with. An equity line on a house can only be completely discharged in a Chapter 13 IF there is absolutely zero equity to which the loan actually adheres.
So, if my potential client does follow through with this secured consolidation loan, then she has closed off the possibility of shedding that debt unless she sheds the house as well. This may be a great strategy. She may have enough income that is reliable enough to make that extra house payment and still meet her living expenses. I just want her to know that doing so commits her to that one way out of debt and to make that decision with as full knowledge as she can get. And, if it works out, I am glad for her. If it does not work out, well – perhaps I can still help her save the home with a Chapter 13.
- CAUTION: Tax Refund
- When Business Owners Should File Bankruptcy
- To File or Not to File: Attorney decision making
- Deadlines for Filing Prepetition Tax Returns in Chapter 13 Cases
- Delinquent Property Tax Claims in Chapter 13 Cases
- Lessons Learned the Hard Way
- Miscellaneous Hot Topics in the EDKY
- ‘Tis the Season
- How to Choose a Bankruptcy Lawyer
- The Entrepreneurship – Bankruptcy Intersection
- Making Chapter 13 Plan Payments in the E.D. Ky. – New Online Payment Option
- “I’ve Changed My Mind – I Want to Surrender My House”: What Effect Does Post-Confirmation Surrender Have on the Debtor’s Discharge?
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